Managing construction requires resiliency— it is one of the abilities of a successful construction manager. Construction companies do whatever it takes to survive the ups and downs of the economy and the competitive environment. This sometimes means taking on low-profit margin or even no-margin construction projects to keep the cash flowing and their crew working.
During these unprecedented times where the pandemic has put construction businesses, like many others, into a tailspin, some general contractors and subcontractors will be faced with the bid decision of whether to take on a project that seems riskier than normal. It is true that no construction job is without some uncertainty. Still, there are some obvious warning signals that construction companies should recognize and assess before deciding on whether to accept a borderline project or pass it up.
Before we proceed with the warning signs that you should check before signing a construction job contract, it is essential to look over what you currently have— especially the financial aspect of your business.
How to Assess Your Construction Company’s Finances
1. Look Over Your Numbers First
Before bidding on any construction job, you need to be realistic about how much it will cost your company to finish the work according to the required specs on time. Ask yourself the following questions:
• What are my construction crew costs to complete this job— workers’ compensation, wages, benefits, payroll tax, and insurance needs?
• How much money will be needed to travel to and from the construction job site? What about the expenses of transporting equipment or machinery and keeping it secure and maintained while on-site?
- Are any rental tools, machines and attachments required? If so, how long will you need them and how much will it cost to rent them for that period of time?
- What are my expenses for everyday fuel and routine maintenance over the timeline of the project?
- What percentage will the contingency fund cost for unexpected breakdowns or downtime on the jobsite?
- What are the costs for insurance, contracts, and bonds?
- How much time will I (or other project stakeholders) personally spend overseeing the whole construction crew management? Will that come at the expense of other potential projects? How much is the time of my team worth?
Only you can determine how much revenue you want to make on each construction job. However, the only way to bid the work so that you get a profit is to estimate your costs accurately first and foremost. And if the numbers show you that it can’t be profitable, believe them – it’s time to take a pass on this specific project.
Numbers never lie.
2. Assess Your Current Financial Situation
Saying no to some project is easy – you don’t have the right team, the right skills, or the suitable materials, and getting them in time to complete the work is far from possible. But other construction projects fall into a gray area. Maybe you don’t have the right equipment you need, but you could rent one. Perhaps you don’t have enough staff or operators, but you know some excellent laborers are looking for work.
In these circumstances, the decision may come down to your comfortability with financial risk.
Are you in a position to buy, rent or finance the needed equipment or take on the costs of increased wages, benefits, and training? If your answer is yes, and you’ve run the numbers necessary to determine you can make a profit, then bidding on the construction project may be worth it. But if these added expenses will drain your capital, it’s likely a project not worth taking.
On the get-go, some projects look like can’t-miss or once-in-a-lifetime opportunities, but when you dig a little deeper, you discover they’re a better fit for other companies to handle. The reverse can be true as well. Less flashy and lowkey projects can turn out to be your most profitable in the end. The only way to know is to do your homework first– and don’t be afraid to say ‘no’ on the jobs that won’t pay off.
Another way to assess your current financial situation is by making a construction inventory list of all your company’s resources so that you have a bird’ eye view of your company’s biggest asset. An inventory management software like Pro Crew Schedule can make this assessment more convenient for you and your team.
5 Signs of a Construction Project Not Worth Taking
1. Bad Owner’s Credibility and Reputation
Meeting the client’s expectations is key to a successful project, but not all clients act in good faith or have the intention to drive a favorable job outcome.
Contractors should conduct due diligence before signing onto a project if the project owner has a less than excellent reputation or is an unknown entity in the construction community. You have to know more about the people you’re going to do transactions with, so you have to investigate to understand who they are. Try to look into their general background and know who they are, what they are capable of doing, and their history in this line of work to get a comfort level moving forward.
A search for past lawsuits between the owner and their previous contractors, as well as for contracts and liens, could shed some light on whether the client gets sued frequently and how your future relationship could unfold.
2. Disorganized Construction Project
One of the first signs is how well the owner has planned and organized the construction project. For instance, the owner should provide a complete, pre-approved set of drawings along with up-to-date swatches and specifications.
Suppose the owner has either too many omissions or inconsistencies in the provided information. In that case, that might be a warning for the contractor that it is not a project worth handling, as it would only result in problems down the road. An incomplete set of project documents could be a potential indicator that the owner is expecting the assigned contractor to fill in the gaps, and those gaps usually cost money.
Another consideration is the experience and availability of the design team and architect, the owner’s representative, or other designated decision-makers on the construction project. Not only is it essential to be able to have convenient access to the individual who can deliver quick decisions regarding major items like project change orders, organizing construction inventory lists, but it’s also important that they have the necessary experience.
For instance, is the point person’s experience in a residential building but the project for bid is an 8-storey commercial building?
The bottom line is that contractors don’t usually have time to guide the owners and show them the ropes, which could unfold if the owner and its representatives don’t possess enough skills and knowledge about managing the project.
After all, contractors specialize in executing a construction plan that’s been organized and well-thought-out from start to finish.
3. Unclear Financing
Contractors need to ensure that money is available to finance the construction project, which could mean hiring someone to professionally investigate the owner’s finances. It’s undoubtedly worth conducting for a project of any magnitude.
If the right to verify financing is included in the contract as it is in standard forms such as the American Institute of Architects’ General Conditions of the Contract for Construction, then the contractors should make sure it is included before signing any document— and that it stays there.
It’s not uncommon that some owners will try to remove the right for contractors to verify financing from the contract. Those owners include those new to the construction industry and those who don’t respect that the contractor is entitled to the information.
However, there is no reason not to provide that information because it gives the contractor some security that a lender or bank or somebody will ensure that they get paid for the job they will be doing.
Contractors should also keep in mind that in agreements, they have the right under particular circumstances to delay the start of work or stop work if the owner does not provide proof of suitable financing.
4. Disadvantageous Construction Contract Provisions
When it comes to project management for construction, it’s all about understanding the risk.
If the project owner makes the contractor responsible for all known or unknown conditions, whether visible or not visible, the construction company must decide whether that’s a risk it is willing to take.
An alternative to stepping away in that situation would be to raise the price or negotiate unit pricing to act as contingency and compensate for the unknown. It’s the developer’s project; only the developer should be assuming those risks.
It doesn’t matter if some provisions are part of standard agreements; contractors shouldn’t be afraid and shy away from negotiating for more favorable terms.
5. Taking Over for Another Contractor
Taking over a construction project when the original contractor has been terminated or has walked off the project can be tricky. The first reason a construction company needs to find before agreeing to take on this kind of project is why the previous contractor is no longer on the job.
Regardless of the reason, general contractors should be specific in their contracts about what scope of work they are taking on, what scope has been completed by the previous contractors, and how they will limit warranties and owner indemnification once the project is completed.